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February 25, 2013

Despite Challenges, Spanish Banks Turn the Corner

It has been a harrowing few years for the Spanish banking system, but now, some experts believe that it is on a positive course for the future.

“There’s no doubt that the large-scale restructuring undertaken [by Spanish banks] through 2012 and that was required for the system to get back on its feet is now more or less complete,” said Carmen Munoz, a senior director in the financial institutions group at Fitch Ratings in Barcelona. “Those banks that were the most vulnerable have been recapitalized, and all banks are complying with regulation for provisions against real estate loans.”

Today, the stronger banks in Spain have recurring income generation capacity and have reached a position from which they can start to go back to relying on a “business-as-usual mode,” through which they can generate revenues from retail franchises, Munoz said. “Together with cost-control measures, this will strengthen them further and support their bottom line. The restructured banks, meanwhile, are concentrating on downsizing.”

One important factor that experts point to is the resurgence of the covered bond market in Spain. Prior to the crisis, Spanish banks relied on covered bonds for their funding purposes, and in January, more than 6 billion euros of European covered bond issuance came from Spain.

That’s the same volume that was issued in Q1 2012, according to Ralf Grossmann, head of covered bond origination at Société Générale in London. However, while in 2012 Spanish covered bond issuance ebbed and flowed as a reflection of the concerns investors had over the banking sector, many investors now are far more optimistic about the health of Spanish banks, and that increased confidence is likely to lead to a more sustained and stable flow of new deals, he said.

“We do expect issuance windows this year to be larger and more sustained given that the situation has fundamentally improved and as investors shift their focus away from the banking sector and toward the Spanish economy in general,” Grossmann said.

Investors are also looking for yield, and the pickup of 270 basis points over swaps that January’s Spanish covered bonds offered made for an attractive investment, according to Grossmann.

“We had a good pick up from the domestic investor base, of course, but compared to last year, when domestic investors made up more than 50% of the buyers, this year we saw that decrease to 30%, with more buyers from other European countries participating,” Grossmann said. “Last year, too, deal maturities were on the short end, typically between two and five years, whereas this year, the deals are longer-dated. We even had a 10-year deal from BBVA.”

More importantly, some Spanish banks have also been able to issue equity. Banco Popular, for instance, sold 2.5 billion euros in shares in December, and others have been able to successfully issue senior debt, a testament to increasing investor confidence, Munoz said.

But even if the health of the Spanish banking sector is quite transparent now, it’s clear that banks, both strong and weak, will have to contend with all the challenges that the weaker Spanish economy will bring, including low interest rates, high unemployment and others, Munoz said.

Those challenges aside, many Spanish banks are still sunk in the property morass, according to Bill Blain, a strategist at Mint Partners in London. Although the Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (SAREB), an institution that was created to buy and sell banks’ bad real estate assets, is beginning to sell property, the process is attracting some domestic backlash.

“There is still lots of pain to come in Spain, and that makes people nervous about Spanish banks,” Blain said.